Smaller firms face New Year funding crisis

Smaller firms face a funding crisis in the New Year as 'committed' credit lines are withdrawn, Financial Mail understands.

Race against time: Small firms are rushing to put finance in place

Such facilities - a cross between a fixed-term loan and an overdraft - were still being offered by banks at the start of this year when it seemed the credit crunch might well blow over.

But most have a 12-month life, so many will expire early in 2009 - and in many cases will not be renewed.

'Banks have stopped lending to any company that seems to have a problem,' said Nick O'Reilly, of accounting and business advice group Vantis. 'And even where such credit is renewed, the cost will have gone right up.'

Unlike a traditional business-overdraft, a committed credit line cannot be withdrawn by the lender before its term has expired.

In common with an overdraft, the interest rate usually fluctuates and interest is paid only on the portion of the funds actually drawn at any one time. There is usually an arrangement fee.

Such funding, thought to total hundreds of millions of pounds, is popular with small and medium-sized enterprises and has been offered extensively in the past by banks.

'They were made available to stop firms from switching to other lenders,' said Stephen Alambritis, head of public affairs at the Federation of Small Businesses.

Funds committed at the start of this year would be coming up for review in what was expected to be the very different climate of early 2009. 'Committed funding will see a lot of SMEs through Christmas, but January, February and March will be a tough time,' said Alambritis.

'Perhaps the banks are rueing the day they signed up to committed funds. Such lending will be a thing of the past for a year or two.'